If it sounds too good: naivety and money

Category: The Naive Mind, Economics Slug: /naivety-and-money/ Meta description: Kicker: The Naive Mind — Issue 5

Money is the clearest room in the house, because the cost of being naive in it is countable. In health, the cost is a vague sense that your body is difficult. In politics, it is diffused across a country and arrives years later. In money, it is a number, it is yours, and it arrives on a statement.

That clarity makes money the best place to watch the mechanism work. Every scheme that has ever taken money from people who could not afford to lose it has used the same two feelings this series is about: I want this, and this is easy. The packaging changes with the decade. The feelings do not.

The offer

Strip the branding from any financial pitch that later turned out to be a trap, and the same skeleton is left.

There is a return that is better than what everyone else is getting. There is a reason, presented as insight, why this return is available: a method, a connection, a market the ordinary investor has not noticed. There is a window, closing. There is a person, or a screen designed to feel like a person, who seems to have your interest at heart. And there is a small first step, easily taken, that makes the second step feel like continuing rather than starting.

The offer may be an investment. It may be a course that promises to teach you how to make the investment. It may be a relationship, conducted at a distance, that arrives at money only after the feeling is established. It may be a currency, a token, a property abroad, a business opportunity forwarded by a friend who has already put money in. The skeleton holds.

The site’s earlier piece on financial scams catalogues the current forms in detail, and this one will not repeat it. The point here is narrower: why the skeleton keeps working on people who have seen it before.

Why it works on the informed

The naive theory of financial naivety is that it afflicts the uninformed. Give people education, the theory goes, and they will stop falling for it.

Education helps, and there is no case against it. But the record is full of victims who were educated, experienced, and in some cases professionally trained in exactly the field where they were taken. Naivety about money is not a knowledge gap. It is the same skipped step as everywhere else: the claim was accepted for how it felt, and the check on what it would take to be true was never run.

The check, in money, is unusually easy to state.

If this return were available, who would already know? The answer is: people whose entire profession is finding returns. If a method reliably beat the market, it would be crowded within months and the return would vanish. An offer that has survived to reach you, a non-specialist, at a return above the market, has one of two explanations. Either it carries a risk that has not been described, or it is not real. There is no third option, and a great deal of money has been lost waiting for one.

If this were true, what would it cost, and who would pay? A return has to come from somewhere. If the pitch cannot say where, in terms you could check, then the source is either the risk you are not being told about or the next person in. The second of those is the definition of a scheme that ends.

The concession – naivety and money are a bad mix

Not every high return is a fraud, and not every confident seller is a thief. Real opportunities exist, some people are early to them, and a rule that rejects every unusual offer would have missed things that turned out to be sound.

But note what “early” means. It means the risk was real and the person took it knowingly. The honest version of an opportunity says so: here is the upside, here is how it could go to zero, here is why I think the first is more likely than the second. The naive version has no second half. It offers the upside as a fact and the risk as an absence.

The distinction is not between high returns and low ones. It is between offers that describe their own cost and offers that do not.

The easy step to set you up: How naivety and money engage

There is one more mechanism worth naming, because it operates after the first check has been skipped and makes the error hard to reverse.

The first step is always small. A modest sum. A free course with a paid module behind it. A message answered. Once the step is taken, the next decision is no longer “should I do this?” but “should I stop?”, and stopping means admitting the first step was a mistake. People will pay a remarkable amount to avoid that admission. Schemes are built to make sure they have the chance.

The defence is to make the decision once, at the start, with both questions asked, and to treat the small first step as the whole commitment. It is much easier to decline a beginning than to abandon a middle.

What careful looks like 

“The careful person is not the one who distrusts everything. They are the one who, on hearing an offer that feels good, notices the feeling and treats it as the signal to slow down rather than the signal to act. They ask where the return comes from and who else would know.”

They read the part of the document that describes what could go wrong, and if there is no such part, they have their answer.

None of this requires expertise. It requires a habit: the feeling arrives, and before it has finished arriving, the question goes out to meet it.

That habit is the whole of this series. It does not make anyone immune. It makes the skipped step visible, which is the only thing naivety has ever depended on.

The Naive Mind is a series on think-smarter.net about the thinking errors we make when a claim feels right. Read the series from the beginning: [The Naive Mind: too good to be true, too simple to be the solution]. For a catalogue of current schemes, see [Financial scams are a growing threat].